Q: Are you worried that homeowners will again turn to their positive home equity as a piggybank to fund their consumer urges?

Panel's answer: Yes , No

There are multiple reasons why households may again extract equity from their homes and spend beyond their means: smoothing consumption when income falls, paying for college, residential improvements, and leveraged investments. Households are encouraged to act this way because most uses are tax deductible. But what about lenders -- will banks be more cautious this time? Fewer borrowers may qualify under tightened scrutiny and lending requirements. Banks typically need a 720 FICO score, a minimum of 20 percent equity in the property, and income documentation. More importantly, however, the lessons from the financial crisis, still reverberating, were not learned; problem banks continue to be bailed out, so, history will likely repeat itself.

Yes
60% (9)

No
40% (6)

At least for now, consumers remain shell shocked from experiencing and/or witnessing the housing market collapse. Problems of too much indebtedness also persist. The “Great Recession” may be this generation’s defining financial lesson. San Diego housing prices remain 34 percent below previous highs but still among the nation’s priciest markets. Contrasted with the area’s median household income, San Diego is also among the nation’s least affordable housing markets. Therefore, there is not much home equity to spend. With consumer confidence mixed, spending is also constrained, at least until the next housing price bubble emerges by the end of this decade.

While housing prices have increased, they are still far from the post-crash highs. So most homeowners have less equity in their homes than in 2005; indeed, some are still underwater, although to a lesser extent than a couple of years ago. I think what happened to those who got burned by taking equity out of their homes is still fresh in the minds of today’s homeowners, so they will avoid the mistakes that were made. On top of that, banks are less likely to make home equity loans, so that will restrict the ability of people to use their homes as ATMs.

The latest Flow of Funds data from the Federal Reserve suggest that net mortgage equity withdrawal is still negative-- households overall are still putting more money into their homes than they are taking out, as has been the case continually since early in 2008. Although some households are back to taking cash out, more are boosting their net worth by making principal payments and through debt cancellation. As for making the same mistakes, house prices have been rising and will continue to do so for the near term, but nobody should be expecting a replay of the huge boom we saw last decade.

We are far too early in the recovery cycle for sufficient home equity to have stockpiled to the level necessary to present a temptation to consumers to binge. In fact, the pendulum has swung from the “easy money” days to the other extreme, where lenders are far more careful as to what loans qualify. As property values inevitably rise and lenders return to the market with HELOCs, we can expect consumers to use that money. But I think that the lesson of the recession to consumers has been to tamp down their insatiable appetites to spend to a level closer to the money at hand.

Not anytime too soon. It usually takes a generation before we repeat the mistakes of the past. The subprime mortgage brokers have been put out of business for a while and some may be plying their trade as easy-credit auto lenders and easy-credit Reverse Annuity Mortgages, so those are the next wave of concerns. The FHA has more discipline and remains the best source of high low-to-value loans. Some homeowners seem to be willing to borrow as much as possible whenever possible, but at least for a few years the market is constraining credit.

Too often we fail to learn from history. The housing market is still in its early stages of recovery and many homeowners are still “under water” with their unpaid mortgage balance exceeding what their home is worth. However, further increases in home prices and a gradual relaxing of lending standards could cause more people to again tap their homes as a source of credit. They may well take on debt burdens that could be problematic as interest rates rise, incomes fail to keep pace with debt servicing obligations, or home prices fall back. Caution is a good watchword.

While memories are short, most homeowners, lenders, and even regulators have not forgotten what happened to the HOME = ATM model of borrowing. Millions of American homeowners are still underwater on their mortgages, and while rising home prices will make them feel wealthier, they are in no position to borrow against their home. Millions more have been foreclosed on, or engaged in short sales. Their damaged credit scores will likely keep them from owning a home, let alone borrowing against it. Those owners who still do have substantial equity in their homes have already demonstrated prudence and restraint.